Big Pension Fund Investor Wants Mix of Row, Permanent Crops

One of the world's largest agricultural land holders takes a different approach to farming

Because it plans on holding it for up 30 years, TIAA-CREF, one of the largest owners of agricultural lands in the world, sometimes approaches farmland differently than the average farmer.

For instance, TIAA-CREF, with $3 billion farmland investments, seeks to put 70% of its assets in row crops and 30% in permanent crops, explains Justin Ourso, agricultural portfolio manager at the Teachers Insurance and Annuity Association, who spoke at the Future Farm Americas conference last week in San Francisco. "It’s a nice way to diversify," he said.

Permanent crops such as wine grapes, nuts, citrus, apples and cranberries take three to seven years to mature. But in the meantime, vines and trees can be depreciated. Moreover, mechanical harvesting of permanent crops removes some labor-supply risk for an institutional investor.

Row crops, on the other hand, produce more stable income over time because planting decisions can be adjusted annually. And it helps that several row crops—corn in the United States, sugarcane in Brazil—can be used to make alternative fuels in addition to feed for livestock.

TIAA-CREF also seeks to obtain the highest and best long-term use of its land assets. Rather than planting whatever crops could make the most money in a year, the fund does a thorough review of soil conditions and topology. It may wind up planting something different than was grown on the farms it buys.

That was the case with a vineyard in California with high water quality the fund bought a few years ago. A portion of the flat land was leased to strawberry growers, since that was determined to be the best use. Avocados were planted on the steep slopes, where they would do better than grapes. A consultant was brought in to help start the crop.

Since it knows going in that it will lease the land to famers, TIAA-CREF may look for land that isn’t "encumbered" with grain storage, sheds and houses. It counts on tenant farmers to have those facilities, particularly in the Midwest.

By leasing farming rights, the pension fund gives up some potential returns, but it also insulates itself from downside risk. "We prefer to get lower risk-adjusted returns," said Ourso.

The fund is willing to take risk on foreign investments, though, given the opportunity to secure high returns. Its portfolio of more than 400 properties, totalling more than 600,000 acres, includes farms in Australia, South America, and Eastern Europe, in addition to the United States.

That includes more than 130 farms in Brazil, where TIAA-CREF looks closely for opportunities where new roads might open up agricultural land. As Brazil’s infrastructure improves, "spreads will close between prices off the farm in Brazil and the prices at the Chicago Board of Trade," said Ourso.

The fund continues to find ripe opportunities in Australia, which hasn’t seen the run-up in farm prices that have occurred in other countries. But there’s added risk to an investment in Australian farm land--water rights trade separately from land. "You need to figure out what your risk profile is."

Ourso said that the fund still finds deals with good relative value in the United States, even though prices have increased in recent years. The fund typically balances four constraints when it assesses investments.

Water. Ourso wants to create a "diverse asset mix" when it comes to the source of water. It looks to spread its investments among farms that rely on aquifers, drip irrigation, and other water sources.

Weather. Ourso said that while you can’t predict the weather, you can prepare for it by building a portfolio with strong geographic diversification.

Soil. The fund looks for farmland with good enough soil to produce right away. But it also prefers soils that can produce different crops to hedge its production bets.

Infrastructure. That includes both infrastructure on the farm. In foreign countries, getting goods to market is a critical concern. In the United States, TIAA-CREF may not want grain storage and a house on the farm.

Despite being one of the world’s largest agricultural land investors, farmland makes up a tiny portion of the pension fund’s $487 billion portfolio. The fund typically won’t look at an investment below $1 million unless it can be bolted onto an existing property. But it has also considered some very large investments over $100 million.

TIAA-CREF didn’t own any farmland until 2008. It established a footprint by purchasing a $300 million portfolio from the State Teachers of Illinois that included farms of grain, soybeans, and other permanent crops. Then it bought controlling interest in Westchester Group, Inc., one of the country’s largest agricultural asset managers.

TIAA-CREF ranked 87th last year on Fortune Magazine’s list of the largest corporations in America.